Dunelm (LSE: DNLM) shares are already down 40% this year. As economic headwinds continue to pick up, retailers are expected to face a decline in revenue and profits. As such, the Dunelm share price may plunge further into the red.
Retail sales tail off
Earlier this week, the BRC retail sales data showed a third consecutive month of declines. Consumers continue to cut spending amid the cost of living crisis, and it doesn’t seem that Dunelm is spared from this. The chief executive of BRC, Helen Dickinson, noted that high-value items such as furniture took the biggest hit.
The rising cost of living is going to remain the main story for retailers for the immediate future, with consumer confidence a key factor to watch out for.
Source: Paul Martin, UK Head of Retail at KPMG
As a result of this, analysts across the board slashed their expectations for the FTSE 250 firm’s future earnings. Dunelm was initially pencilled in for 1% growth this year. However, earnings are now expected to decline by 0.6% after a slew of negative economic data.
Sticking to old furniture
To make matters worse, Dunelm has plenty of other headwinds to contend with. Increase in house prices from a lack of supply means that there are fewer new homes available for people to move into. Moreover, the mortgage rate also saw an increase to 4.25% this week, hindering future home purchases. Additionally, inflation continues to run rampant at 9% on a year on year basis, squeezing consumers’ wallets even further.
How might all this affect the Dunelm share price then? Well, fewer new homes would mean less demand for new furniture and, consequently, less revenue. The lack of disposable income will then result in a slowdown in furniture spend, as evidenced in the BRC retail sales data. As such, I expect Dunelm shares to take a hit.
A new chair
On the flip side, Dunelm hired a new CFO this week in Karen Witts. Having held a number of executive positions at couple of other FTSE 100 companies, I am excited to see how Witts can further improve the company’s already robust balance sheet.
The retailer’s balance sheet is impeccable to say the least. Having no debt and healthy levels of free cash flow, Dunelm has more than enough firepower to combat a potential economic recession later this year. The company has also managed to increase its profit margins from 8.3% to 10.3% over the last two years. As such, I’m eager to see how the new CFO deals with a potentially declining top line to maintain its margins, while satisfying Dunelm’s goal to gain more market share.
With the furniture and home improvement sector having previously defied a declining retail sales trend, Dunelm may be an outlier in the current economic landscape as it offers excellent value for its products. Nonetheless, I remain dubious of its future outlook given the volatile and uncertain economic climate. Therefore, I’ll be waiting for its next trading update before deciding whether to invest in Dunelm shares. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more certainty.
